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Ross 12e PPT Ch03
Ross 12e PPT Ch03
W O R K I N G W I T H F I N A N C I A L S TAT E M E N T S
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KEY CONCEPTS AND SKILLS
3-2
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CHAPTER OUTLINE
• Ratio Analysis
• Sources
Cash inflow – occurs when we “sell” something
Decrease in asset account (Sample B/S)
• Accounts receivable, inventory, and net fixed assets
Increase in liability or equity account
• Accounts payable, other current liabilities, and common stock
• Uses
Cash outflow – occurs when we “buy” something
Increase in asset account
• Cash and other current assets
Decrease in liability or equity account
• Notes payable and long-term debt
3-6
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STATEMENT OF CASH FLOWS
3-7
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SAMPLE STATEMENT OF CASH
FLOWS
Cash, beginning of year 58 Financing Activity
Investment Activity
Purchase of Fixed Assets -196
Net Cash from Investments -196
3-9
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RATIO ANALYSIS
3-10
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CATEGORIES OF FINANCIAL
RATIOS
• Short-term solvency, or liquidity, ratios
• Profitability ratios
3-11
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COMPUTING LIQUIDITY RATIOS
3-14
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COMPUTING INVENTORY RATIOS
B/S
I/S
3-15
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COMPUTING RECEIVABLES
RATIOS
• Receivables Turnover = B/S
Sales / Accounts Receivable I/S
5,000 / 1,156 = 4.33 times
3-16
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COMPUTING TOTAL ASSET
TURNOVER
B/S
• Total Asset Turnover =
I/S
Sales / Total Assets
5,000 / 5,606 = .89
It is not unusual for TAT < 1, especially if a firm has a
large amount of fixed assets
3-18
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COMPUTING MARKET VALUE
MEASURES – I
• Market Price = $87.65 per share
• Shares outstanding = 190.9 million
• PE Ratio = Price per share / Earnings per
share
87.65 / 4.68 = 18.73 times
3-20
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DERIVING THE DUPONT IDENTITY
• ROE = NI / TE
3-21
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USING THE DUPONT IDENTITY
• ROE = PM × TAT × EM
Profit margin is a measure of the firm’s operating
efficiency – how well it controls costs.
Total asset turnover is a measure of the firm’s asset use
efficiency – how well does it manage its assets.
Equity multiplier is a measure of the firm’s financial
leverage.
3-22
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EXPANDED DUPONT ANALYSIS –
DUPONT DATA
3-23
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EXTENDED DUPONT CHART
3-24
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WHY EVALUATE FINANCIAL
STATEMENTS?
• Internal uses
Performance evaluation – compensation
and comparison between divisions
Planning for the future – guide in
estimating future cash flows
• External uses
Creditors
Suppliers
Customers
Stockholders
3-25
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BENCHMARKING
• Time-Trend Analysis
Used to see how the firm’s performance
is changing through time
Internal and external uses
• Extraordinary events
3-27
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WORK THE WEB EXAMPLE
• Go to Reuters website.
Click on Markets, then Stocks, then choose a company
and enter its ticker symbol.
Click on Financials to see what information is available.
3-28
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QUICK QUIZ
3-29
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ETHICS ISSUES
3-30
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COMPREHENSIVE PROBLEM
3-31
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END OF CHAPTER
CHAPTER 3
3-32
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